Ch.12 Market Structure

Question 1

What is a market?

Answer 1

A market is any arrangement/institution in which transaction of goods and services takes place. A market does not require a physical location.

Question 2

What is price competition?

Answer 2

Firms try to keep their cost low and sell at lower prices than other firms.

Question 3

What is non-price competition?

Answer 3

Product differentiation:
1. Product promotion (advertisement)
2. Offering products with different levels of quality and features (including services)
3. Offering products at different times and locations.

Question 4

What is market power?

Answer 4

It refers to the ability of the sellers to set or control prices in the market.

Question 5

What are the market conditions affecting market power?

Answer 5

1. Number of sellers: Increase number of sellers -> Decrease in market power.
2. Easy of entry to the market: Free entry -> Decrease of market power.
3. Nature of product -Homogeneous vs Heterogenous: Increase ability to differentiate the product -> Increase market power.
4. Market information: Increase availability of information -> Increase market power.

Question 6

What is perfect competition?

Answer 6

Perfect competition is also known as perfectly competitive market.

Question 7

What are the features of a perfect competition?

Answer 7

1. Many small sellers and buyers.
2. Sellers are selling homogeneous products.
3. Free entry to and exit from the market.
4. Perfect market information.
5. All sellers and buyers are price takers.
6. No non price competition.

Question 8

Explain on many small sellers and buyers as a factor of perfect competition.

Answer 8

An individual in the market has little or no influence on market price as each seller’s output takes up only a small portion of the market output.

Question 9

Explain on sellers are selling homogeneous products as a factor of perfect competition.

Answer 9

It makes no difference whether buyers buy from one seller or another seller.

Question 10

Explain on free entry to and exit from the market as a factor of perfect competition.

Answer 10

New sellers may enter into the market without any restrictions.

Question 11

Explain on perfect market information as a factor of perfect competition.

Answer 11

Buyers are well aware of prices, quality and availability of the goods. Sellers know exactly what prices they should charge.

Question 12

Explain on all sellers and buyers are price takers as a factor of perfect competition.

Answer 12

No market power. The market price is determined by market supply and demand.

Question 13

Explain on non price competition as a factor of perfect competition.

Answer 13

As the products are regarded as homogeneous.

Question 14

Explain on many sellers and buyers as one of the features of monopolistic competition.

Answer 14

A seller has little or no influence on others’ pricing or marketing strategies.

Question 15

Explain on sellers are selling heterogenous products as one of the features of monopolistic competition.

Answer 15

Sellers can attract consumers through product differentiation. -> non price competition.

Question 16

Explain on free entry to the market as one of the features of monopolistic competition.

Answer 16

New sellers may enter into the market without any restrictions.

Question 17

Explain on imperfect market information as one of the features of monopolistic competition.

Answer 17

Buyers and sellers do not know all aspects of the market.

Question 18

Explain on price searchers as one of the features of monopolistic competition.

Answer 18

Because of heterogeneous products and imperfect information.

Question 19

Explain on both price and non price competition as one of the features of monopolistic competition.

Answer 19

Sellers will try to gain market power through product differentiation.

Question 20

What are the features of oligopoly?

Answer 20

1. Few dominant sellers.
2. Heterogenous or homogeneous products.
3. Entry barriers exist.
4. Imperfect market information.
5. Price searcher.
6. Mutual dependence/ independence in decision making.
   7.Price rigidity.
7. Non price competition.

Question 21

Explain on few dominant sellers as one of the factors of oligopoly.

Answer 21

As a results, the actions of a single firm are able to influence the market.

Question 22

Explain on heterogenous or homogeneous products as one of the factors of oligopoly.

Answer 22

We cannot identify an oligopoly based on the nature of product.

Question 23

Explain on entry barriers exist as one of the factors of oligopoly.

Answer 23

1. Legal restrictions.
2. High set-up cost.
3. The presence of dominant firms.

Question 24

Explain on imperfect market information as one of the factors of oligopoly.

Answer 24

Buyers and sellers do not know all aspects of the market.

Question 25

Explain on price searcher as one of the factors of oligopoly.

Answer 25

Oligopolist is a major market player, it can set its own price.

Question 26

Explain on mutual dependence in decision making as one of the factors of oligopoly.

Answer 26

The action of a seller often influences others, firm will consider the reaction of other firms before making decision.

Question 27

Explain on price rigidity/ price leadership as one of the factors of oligopoly.

Answer 27

1. When an oligopolist lowers the price, other may follow to keep their market shares, this may lead to price war.
2. When one oligopolist raises its price, if all other oligopolists do not follow, they may seize its market share.
3. Result: Price rigidity. Oligopolists tend not to charge the price.
4. Another results: Price leadership. When the biggest firm takes the lead to change its price, other firms may follow.

Question 28

Explain on non price competition as one of the factors of oligopoly.

Answer 28

As oligopolists seldom change their prices, methods of competition other than using price, e.g. advertising, sale services will be practised.

Question 29

What are the features of monopoly?

Answer 29

1. Only one seller.
2. No close substitutes.
3. Entry barriers exist.
4. Imperfect market information.
5. Price searcher.
6. Both price and non-price competition.

Question 30

Explain on only one seller as one of the features of monopoly.

Answer 30

The monopolist can choose what price to charge to maximize its profit.

Question 31

Explain on no close substitutes as one of the features of monopoly.

Answer 31

It is the only provider of its products in the market.

Question 32

Explain on entry barriers exist as one of the features of monopoly.

Answer 32

Entry barriers which prohibit potential sellers from entering the market.

Question 33

Explain on imperfect market information as one of the features of monopoly.

Answer 33

Buyers and sellers do not know all aspects of the market.

Question 34

Explain on price searcher as one of the features of monopoly.

Answer 34

Monopolists can control the quantity supplied of the good and its market price.

Question 35

Explain on both price and non price competition as one of the features of monopoly.

Answer 35

A monopolist still has to face competition.
1. A monopolist has to compete for the monopoly right.
2. It has to compete with producers using similar factors of production.
3. Though there is no direct competition, a monopolist still competes against sellers of its substitutes.

Question 36

What are the source of the formation of monopolies and oligopolies?

Answer 36

1. Restricted entry by the government.
2. Natural monopoly.
3. Sole and exclusive Ownership of important resources.
4. Integration and collusion.

Question 37

What are the examples of restricted entry by the government?

Answer 37

1. Government ownership. e.g. The Hong Kong Post Office, The Water Authority. Government runs the industry and other sellers are not allowed to enter.
2. Sole ownership of government franchise. e.g. Kowloon Motor Bus Co. Ltd, Star Ferry Co Ltd, Hong Kong Tramways Co Ltd. Government gives a firm the right to be the only supplier of a good or service.
3. Sole ownership of patents and copyrights. Patents are granted to inventors Copyrights are granted to composers and authors. To let them have the exclusive right to reproduce their inventions and compositions for a fixed period of time.

Question 38

What is natural monopoly?

Answer 38

It refers to a situation where a single firm can supply a good or service to the whole market at a cost lower than two or more firms can.
i.e. the production cost of a firm is low enough to allow it to charge a price that can refrain the entry of or drive all the competitors out of the market.

Question 39

What are the requirement of natural monopoly?

Answer 39

1. Internal economies of scale. e.g. China Light and Power Ltd, Hong Kong Electric Co. Ltd, Hong Kong and China Gas Co. Ltd.
   Sales increases -> Average cost decreases.
   -> More efficient than other firms.
   Drives other firms out of the market/ prevent firms from entering the market as they cannot compete with the price.
2. Huge capital requirement. e.g. Hong Kong and China GAs Co. Ltd, MTR. For some industries, it requires huge capital to set up a firm, making it difficult for new sellers to enter the market.

Question 40

What is the sole and exclusive ownership of important resources?

Answer 40

When a firm owns an important resource, it becomes difficult for other firms to enter the industry. E.g. De Beers Co.

Question 41

What is the integration and collusion?

Answer 41

Collusion refers to collaboration among rival firms to increase their joint profit. Cartel is a form of explicit collusion. E.g. the Organization of the Petroleum Exporting Countries.